Consumer Confidence and Economic Fluctuations

If consumers become pessimistic about the state of the economy, can there be a slowdown in output, even if their pessimism is not based on economic fundamentals? Recent macroeconomic models show the answer is yes, if there are “strategic complementarities” and multiple equilibria. We investigate the link between consumer confidence and economic fluctuations using vector autoregressions. In all models, after controlling for economic fundamentals, the hypothesis that consumer sentiment does not cause GNP (in the Granger sense) can be rejected. Variance decompositions suggest that consumer sentiment accounts for between 13 and 26 percent of the innovation variance of GNP.